Welsh Government prepares ground for agreeing tax powers

John Osmond reports on yesterday’s Changing Union conference on the Silk Commission’s recommendations for devolving fiscal responsibility to Wales

November 27, 2012November 26, 2012

Placing a floor under the Barnett formula which determines the size of the Wales’s block grant funding, could pave the way for a deal on granting new tax powers for Wales. This emerged as a distinct prospect during a conference organised in Cardiff yesterday by the UK’s Changing Union project organised by the IWA, the Wales Governance Centre and Cymru Yfory/Tomorrow’s Wales. The conference examined last week’s recommendations from the cross-party Silk Commission on tax and borrowing powers for Wales.

The Commission’s 33 recommendations for a wide range of taxation powers that would allow the Welsh Government to raise up to 25 per cent of its revenue, crucially included one stating that they should not be brought into effect until reform of the Barnett formula ensures there is “fair funding” for Wales.

This was echoed by First Minister Carwyn Jones last week when he said he accepted all 33 recommendations of the Silk Commission’s report but emphasised that they were inter-related and stressed the need that reforming the Barnett formula was necessary to ensure that Wales did not lose out if it acquired taxation powers.

At present, when budgets are increasing, the way the Barnett formula operates results in a convergence between Welsh funding and the lower overall English rate. Currently this is not the case since spending is being generally reduced, but historically the position has resulted in substantial under-funding for Wales. “Placing a floor under Barnett” would ensure this does not happen in future.

Under the Silk recommendations the Assembly’s income from sharing income tax generated in Wales with the UK Government would be accompanied by a decrease in the block grant which would still make up the bulk of the Welsh Government’s funding.

The crucial question is how precisely the block grant would be calculated once a new taxation regime had been introduced. The Holtham Commission that preceded Silk calculated that currently Wales loses out by around £350 million a year through the way the Barnett formula operates. In contrast both Scotland and Northern Ireland, but especially Scotland, benefit disproportionately.

The key recommendation in the Silk Commission’s report on this matter was that “the transfer of income tax powers to the Welsh Government should be conditional upon resolving he issues of fair funding in a way that is agreed by both the Welsh and UK Governments.”

Carwyn Jones will be responding to a debate on the Silk Commission’s recommendations in the Senedd today and commentators will be listening closely to what he has to say about what constitutes an adequate resolution to the Barnett formula “fair funding” problem.

Some take the view that the only really fair way to reform the way funding is distributed to Wales, Scotland and Northern Ireland is to calculate it on the basis of “need”, in the way that funds are distributed to local authorities within England, rather than per head of population. However, the political reality is that if the First Minister insists on this requirement then progress on the Silk recommendations will be kicked into the long grass beyond Scotland’s independence referendum in autumn 2014.

Currently Scotland benefits disproportionately from Barnett by as much as £4 billion a year. Any suggestion that this might be cut substantially would be gift to the SNP’s case in the referendum.

Speaking at yesterday’s Changing Union conference Finance Minister Jane Hutt underlined the importance of a Joint Statement on funding issued on 24 October by herself, the Chief Secretary to the Treasury Danny Alexander and the Secretary of State for Wales David Jones. This addressed the underlying reason why the Barnett formula has produced Welsh underfunding in the following terms:

“The Welsh Government strongly believes that there is no case for further convergence in Welsh relative funding. The UK Government recognises that there has been convergence in Welsh relative funding since the start of devolution, and that this is a significant concern in Wales.

“Both Governments accept that, on the basis of present UK Government spending plans, there is unlikely to be further convergence over the current budgetary planning horizon. A small amount of divergence is likely to occur over the remainder of this spending review period, but the overall trend of convergence is very likely to reassert itself once spending starts to increase.

“In future, in advance of each spending review there will be a joint review of the pattern of convergence by the two Governments. If convergence is forecast to occur over the course of the spending review period, both Governments will then enter into discussions on options to address the issue, based on a shared understanding of all the evidence available at that time.

“Both Governments commit to negotiating to achieve a sustainable arrangement for Welsh devolved funding and the UK public finances, that each can accept as being fair and affordable.

“The Welsh Government believes that a mutually acceptable outcome to those discussions is an essential precondition for any significant devolution of taxes and the UK Government will only implement such changes with the consent of the National Assembly for Wales.”

Yesterday Jane Hutt provided a strong hint that this statement went a long way to providing an insurance policy for the Welsh Government against any deleterious impact on Wales resulting from tax powers – that, in effect, it would be sufficient to address the “fair funding” question. As she put it, “This is the first time that the UK Government has acknowledged publicly the convergence issue. It gives us a common starting point for future debate.”

Later in the conference Gerry Holtham who chaired the Commission on Funding and Finance for Wales, supported the case for a Barnett floor being sufficient to enable devolution of tax powers. As he said, “If you demand a complete needs-based reform of Barnett before agreeing to tax powers then it simply won’t happen. However, if you’ve got an undertaking on putting a floor under Barnett then that should close the deal.”

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